The 'excess liquidity' usually means that I somehow end up having to pay more interest on my loans, or getting less interest for my deposits, writes Ravi Srinivasan.

Whenever I hear the words ‘excess liquidity’, I begin to worry. It usually means that I somehow end up having to pay more interest on my loans, or getting less interest for my deposits — because the economy and the banking system have trouble dealing with all that extra cash sloshing around in the system.

That is apparently why the Reserve Bank of India stepped in a couple of days ago and hiked the amount of cash banks will have to keep locked up with it. The banking regulator doesn’t want too many rupees being injected into the economy at this point of time, which will have the potential of pushing the inflation rate up.

Good on them, I say. As a consumer, I am all for moderate inflation rates. Especially since the private sector has long buried the concept of an inflation index-linked ‘dearness allowance’, which was supposed to automatically prevent your real disposable income from eroding.

That was in another time, in another India. Today, the economy is booming, most companies have to deal with global, not local competition, and an acute shortage of talent, which ensures that performers do end up getting rewarded.

So how about applying the same principle to the hard-working Indian bank customer? I am talking about ordinary Joes like you and me, not behemoth corporations, which anyway have the world beating a path to their door.

According to some estimates, just before the RBI stepped in and sucked some funds out, the banking system had an estimated Rs 40,000 crore of ‘excess liquidity’ — bankerspeak for cash.

I admit I got my degree in economics more than a quarter of a century ago, but I don’t think the laws of supply and demand have changed much. So, if there was a lot of excess money floating around, one would have thought that banks would have cut lending rates to drum up more business.

So have home loan rates dropped? Automobile loans become cheaper? Have credit card companies started charging less? You know the answer to all these questions as well as I do.

India is a nation of savers. Almost all the investments made in this country have been funded out of money raised from its domestic sector — either by the government by way of taxes, or by the banking system.

Yest, the common man continues to be punished for being financially prudent. Global markets are tumbling because US borrowers are defaulting on home loans. In contrast, India’s retail, or individual default rate, even in unsecured credit, is one of the lowest in the world, despite paying interest charges which are higher than the maximum imposed on licensed money lenders!